Distributions from trusts to beneficiaries can be structured in a variety of ways. One option is to allow the beneficiary to demand distributions at any time he or she desires. While this option offers the greatest flexibility and freedom to the beneficiary, it offers the least amount of asset protection. It is probably effective for sheltering the inheritance from a divorcing spouse, but is unlikely to provide much protection from other creditors.
A second option is to mandate distributions of income (or a set percentage of the Trust, otherwise known as a Total Return Unitrust (“TRU”) trust) and allow access to principal for specified reasons such as health and education. While this option provides good protection for the undistributed trust principal, the distributed income and principal may be subject to the claims of divorcing spouses and creditors.
A third option is to give your Trustee discretion as to when and if to make distributions. These “discretionary” trusts offer the greatest divorce and asset protection because the decision to make or not to make a distribution is in the hands of your Trustee, and not under the control of the beneficiary. For this reason, trusts with spendthrift or addicted beneficiaries are usually drafted as discretionary trusts.
Finally, trusts for special needs beneficiaries must contain special provisions that protect the inheritance from being claimed by any government agency or causing the special needs beneficiary to lose eligibility for government assistance programs.
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